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Minerals Industry Report

Are Mining Stocks Poised for a Better Second Half?

Mark Reichman, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to end of report for Analyst Certification & Disclosures

Underperforming the broader market. Mining companies (as measured by the XME) declined 4.4% during the June quarter versus a 3.8% increase in the S&P 500 Index. Notably, after posting 2.9% and 15.4% declines in April and May, the XME rose 16.3% in June on the back of higher gold prices which rose 8.0%. During the first half of 2019, the XME was up 8.4% but still lagged the S&P 500 Index which appreciated 17.4%.

Key drivers of precious metals performance. In our view, monetary policy, geopolitical risk and trade will most likely drive movements in gold for the remainder of the year. While fears of a global or U.S. recession appear to have been deferred for the moment, they have not faded, in our view.

Mining stocks offer an attractive option for gaining metals exposure. In our view, mining stocks are an attractive way to gain exposure to metals given their leverage to strengthening metals prices. Precious metals equities may provide a hedge against volatility in the equity markets and offer diversification benefits.

Metals and Mining Commentary - Second Quarter 2019

Mining companies (as measured by the XME) declined 4.4% during the June quarter versus a 3.8% increase in the S&P 500 Index. Notably, after posting 2.9% and 15.4% declines in April and May, the XME rose 16.3% in June on the back of higher gold prices which rose 8.0%. During the first half of 2019, the XME was up 8.4% but still lagged the S&P 500 Index which appreciated 17.4%. During the second quarter, the price of gold increased 9.1%, while silver increased 1.3%. Futures suggest gold above $1,400 an ounce in 2020, with silver prices in the mid- $15 range. The gold/silver ratio was 92.0x at the close of the quarter and we still maintain our view that silver is undervalued relative to gold and thus could represent greater long-term price appreciation potential.

Among base metals, copper and lead fell 7.8% and 5.3% during the second quarter, while zinc eked out a 1.3% gain. During the first half of 2019, gold was up 9.9%, silver declined 0.9%, copper rose 3.0%, lead fell 4.7% and zinc was down 0.9%. What can investors expect for the remainder of 2019?

A few of the key contributors to gold’s strength in June included a rather dovish posture from the Federal Reserve Open Markets Committee when it decided to maintain the target range for federal funds rate and suggested the potential for the future rate cuts by mentioning in its release that it could “act as appropriate to sustain the expansion.” Accommodation by the the Fed could send the dollar lower which would be supportive of precious metals. Second, trade concerns, particularly with China, helped sustain gold’s rally along with increasing geopolitical tensions, most notably with Iran. Interestingly though, second quarter sales of gold bullion by the U.S. Mint totaled a modest 19,000 ounces, compared to 90,000 ounces during the first quarter and 77,000 ounces during the prior year period, which implies that the June rally was likely driven by the purchase of gold-backed exchange-traded products rather than physical coin investment. We generally view physical buying as an indicator of the breadth of such rallies. For example, the U.S. Mint has been challenged in past years to keep up with demand when prices were rising.

In our view, monetary policy, geopolitical risk and trade will most likely drive movements in gold for the remainder of the year. While fears of a global or U.S. recession appear to have been deferred for the moment, they have not faded, in our view. Underscoring concerns about economic growth, a more dovish posture by the U.S. Federal Reserve and other Central Banks, including the European Central Bank and Bank of Japan, may strengthen gold's appeal, especially when one considers that real interest rates are negative in some countries. We note that, according to the World Gold Council, first quarter global gold demand increased 7% on a yearover-year basis with Central Bank purchases representing the largest since the first quarter of 2013, China and Russia have been buyers as they have sought to diversify away from the U.S. dollar.

With respect to base metals, issues around trade and economic growth will continue to influence demand expectations. While these will influence near and intermediate prices for copper, we are very constructive on the long-term outlook due to growing sources of demand that include components for electric vehicles, charging stations and electronics and support investment in new sources of supply.

In our view, mining stocks are an attractive way to gain exposure to metals given their leverage to strengthening metals prices. Additionally, we think precious metals equities also may provide diversification benefits and may provide a hedge against volatility in the equity markets.

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ANALYST CREDENTIALS, PROFESSIONAL DESIGNATIONS, AND EXPERIENCE

Senior Equity Analyst focusing on Basic Materials & Mining. 20 years of experience in equity research. BA in Business Administration from Westminster College. MBA with a Finance concentration from the University of Missouri. MA in International Affairs from Washington University in St. Louis. Named WSJ 'Best on the Street' Analyst and Forbes/StarMine's "Best Brokerage Analyst.” FINRA licenses 7, 24, 63, 87.

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RESEARCH ANALYST CERTIFICATION

Independence Of View

All views expressed in this report accurately reflect my personal views about the subject securities or issuers.

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Ownership and Material Conflicts of Interest

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NOTE: On August 20, 2018, Noble Capital Markets, Inc. changed the terminology of its ratings (as shown above) from "Buy" to "Outperform", from "Hold" to "Market Perform" and from "Sell" to "Underperform." The percentage relationships, as compared to current price (definitions), have remained the same.

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